"If you don’t see the world the way it is, it’s like judging something through a distorted lens,” said Warren Buffet partner, the 99-year-old Charlie Munger.
Mad Hedge Biotech and Healthcare Letter
March 2, 2023
Fiat Lux
Featured Trade:
(AN UNBEATABLE STOCK REFORMING THE SECTOR)
(LLY), (JNJ), (SNY), (NVO)
After starting 2023 with such great promise, practically all major stock indexes in the United States fell last month. Stocks dipped because of the unrelentingly rising inflation, which economists anticipate to lead to another round of seemingly unstoppable interest rate hikes later in the year.
What can stock investors do in this climate?
The ideal stocks in this situation are those defensive in nature because they tend to be less reactive or sensitive to macroeconomic conditions. As a result, defensive stocks deliver relatively solid price performance in bear and bull markets.
Defensive stocks are companies whose products or services are considered essential or necessary, regardless of economic conditions. These companies typically provide products or services that people and businesses cannot easily do without, such as healthcare, utilities, and consumer staples. Because these companies are less susceptible to fluctuations in the economy, they are often viewed as a safe investment option during times of market uncertainty.
Eli Lilly (LLY) stands out as one of the best defensive stocks in the biotechnology and healthcare sector today.
With over 38,000 employees across the globe and products commercially available in at least 120 countries, the company is no doubt a dominant presence in the industry. It is a global pharmaceutical organization that develops, manufactures, and markets drugs for a wide range of medical conditions, including diabetes, cancer, and autoimmune disorders.
The company has been in operation for over 140 years and has a strong reputation for innovation and research. Apart from Johnson & Johnson (JNJ), Eli Lilly’s market capitalization of roughly $327 billion makes it the most prominent pharmaceutical business worldwide.
Meanwhile, Eli Lilly pays out a dividend that yields around 1.1%. Over the trailing decade, this giant drugmaker’s dividend has experienced a consistent increase of about 130%.
Given that Eli Lilly is a healthcare company that produces medicines for life-threatening and chronic conditions, it can be considered a defensive stock.
In 2022, the company’s shares gained approximately 32.4% thanks to its solid organic growth and deep and diverse new treatments and drugs pipeline. Considering its history and track record combined with the market's volatility, Eli Lilly also benefited from its image of being a “safe” stock.
Despite the uncertainties, Eli Lilly looks to be poised for another healthy run in 2023. In terms of growth, the company is projected to climb higher courtesy of its newly approved diabetes and obesity drug, Mounjaro, which shows impressive potential. The company also has a promising pipeline, with several high-value candidates in the immunology and dermatology segments expected to gain approval this year.
Recently, Eli Lilly announced that it would put a cap on the out-of-pocket expenses for insulin at $35 per month for uninsured patients and those covered by commercial insurance. The company also surprised the public by announcing its plan to lower the price of this highly controversial drug by 70%.
After drugmakers jacked up the price of insulin in the past years, this drug became the symbol of out-of-control healthcare costs.
In the US alone, over 30 million people suffer from diabetes. Of these patients, more than 7 million need to take insulin every day. The alarming part of this situation is that 1 in 7 patients who require insulin daily find their budget affected at “catastrophic” levels because of the medication’s cost. These patients allot a minimum of 40% of their disposable income to the treatment alone.
This is why Eli Lilly’s announcement marked a significant development in the sector after months of aggressive lobbying to lower the price of the drug. With the company’s decision, the pressure became more intense for other drugmakers to follow suit. Specifically, major insulin distributors like Sanofi (SNY) and Novo Nordisk (NVO) are urged to apply the same rule.
All in all, Eli Lilly has a virtually recession-proof model and a positive long-term outlook. I suggest you buy the dip.
Ladies & Gents - Start preparing now for Sadie Hawkins Day.
March 1, 2023
Hello everyone,
Today, I am going to delve into the history and meaning behind Sadie Hawkins Day. If you haven’t heard of it, it will be an interesting bit of trivia to remember and file. It is usually celebrated on November 13th, but it can be on different days in different states. Sadie Hawkins Day was created by Al Capp in his cartoon comic strip, “Li’l Abner”. It is set in the fictional mountain village of Dogpatch, Kentucky. It publicly debuted on November 15, 1937.
The story goes that Sadie’s father, Hekzebiah Hawkins, a wealthy and prominent person in Dogpatch, was frantically worried that his homely daughter would be left on the shelf and remain a spinster, so he created Sadie Hawkins Day, where unmarried women could literally chase after the town’s bachelors – ask them out on dates, ask them to dances and ask them to marry them. The comic strip took on a life of its own, and as often happens, life imitated art. In the late 1930s, on college campuses and in high schools across the U.S., Sadie Hawkins Day dances became an annual tradition.
SHD in its day was seen as an empowering rite of passage for women. In the modern age, women confidently assert their right to ask a man they like out on a date. “Let’s meet up”, is a common texting term across an iPhone screen. What happened to the old-fashioned tradition of ringing someone up and verbally asking them out on a date? Is that seen as too aggressive now? Or is it easy to hide behind a text? Today, the whole idea of Sadie Hawkins Day is anachronistic and even a bit insulting. Al Capp asserts that any homely lady would have trouble attracting a mate – I can hear everyone yelling at this opinion and rightly so. Hence, the comic strip’s controversial nature.
What became of the protagonist, Li’l Abner? Daisy Mae eventually caught him, after he spent around two decades attempting to escape her clutches. He finally married her in 1952.
But there is a darker side to this story. Al Capp, the man that created the idea was said to be a womanizer, a misogynist, and an accused rapist. He had a reputation for seducing and sexually assaulting aspiring actresses, including a young Goldie Hawn and Grace Kelly, and sleeping with the college girls he met on his Sadie Hawkins Day tours. (Does that behaviour remind you of anyone?)
What has all this got to do with the markets, the economy, and finance in general?
Nothing.
Nobody can spend 24 hours every day digesting market gyrations and info. Everybody needs light relief.
Anyway, you all know what the market is going to do.
In general, and in brief:
S&P - rally and then fall next year.
Nasdaq - fall, rally, and then fall next year.
Gold - fall, rally, and then fall.
Natural Gas - rally to around $5.00 by August 2023.
Crude - fall, then rally and then fall.
U.S.$ - rally a little, then fall, and then rally.
And let’s not forget interest rates - higher for longer.
To make the most of these moves and get access to detailed trades, sign up for John’s service, and/or sign up for my newsletter, and/or join me and Gloria Hartney as we present The MunroHartneyReport once a fortnight. First meeting is this Friday at 5:00 pm QLD/6:00 pm VIC/NSW time. If you do not have a link and would like to join us, please email me.
Many blessings.
Have a great week.
Cheers,
Jacque
What a great way to see your team – as human beings.
Global Market Comments
March 2, 2023
Fiat Lux
Featured Trade:
(TOUCHING BASE WITH WARREN BUFFET),
(BRK/B), (AMEX), (KO), (MS), (TSLA)
CLICK HERE to download today's position sheet.
So how does someone with 55 years of investment experience like me learn something new? Listen to someone with 80 years of experience.
It is with great anticipation that I read Warren Buffett’s annual letter to shareholders. Having banged the table for decades that his Berkshire Hathaway (BRK/B) is a “must own” stock, keeping up with the 92-year-old Oracle of Omaha” is essential.
Besides, Warren was one of the founding subscribers to The Diary of a Mad Hedge Fund Trader 15 years ago.
I’ll give you the high points.
Berkshire companies took in a record $30.8 billion in operating profits in 2022, producing a net 3% gain in the share price.
Sounds like a deal to me!
Buffett describes himself as a business picker, not a stock picker. Over time, the great businesses prosper and compound, while the poor ones fail. The flowers bloom and the weeds wither away.
One need look no further than the Dow Average, where NO stocks were able to stay in the index over the last 100 years because of business failures. (Corn Products Refining Company? Woolworth’s? Union Carbide?). This is known as “creative destruction,” which moves capital out of the past and into the future.
“Efficient” markets exist only in textbooks, their day-to-day behavior “baffling” and only understood in retrospect.
In the ultimate act of humility, Buffet confesses to only making a dozen good decisions in his life. Coca Cola (KO) was one of those. His initial investment of $1.3 billion in 1994 is now worth $25 billion and now spins off an annual dividend of $700 million.
American Express (AXP) is the same, the initial 1995 investment of $1.3 billion is now worth $22 billion, paying $302 billion a year in dividends. Over the same time frame, an investment in 30-years bonds yielded nothing.
Warren makes the case for share buybacks, which he regularly executes whenever (BRK/B) trades at a discount. When the share count goes down, the shareholders’ ownership of the businesses goes up. This is how Berkshire created many $100 millionaires over the years.
Buffet also makes his annual case for the “Great American Tailwind.” In Buffet’s 80 years of investing, he has only seen it becalmed occasionally and briefly. Never bet against America.
Buffet started his investing career in April of 1942. Unknown to him, the US was about to win the Battle of Midway. Stocks bottomed and launched a torrid 20-year run, even though the public was unaware of the victory for three more months. It’s proof that markets see things before we mere mortals do.
As for me, I suppose I have to be even more humble than Warren Buffet, for I have only made four good investment decisions in 50 years. I agreed to accept a job offer from The Economist magazine in London, kicking off a half-century of intensive research. I took a big pay cut to go to work for Morgan Stanley (MS), which rewarded me with pre-IPO stock at book value of 25 cents a share. I bought Apple (AAPL) at $2 when Steve Jobs returned to run the company on the edge of bankruptcy. I bought Tesla (TSLA) at a split-adjusted $2.35 a share in 2010, completely buying into Elon Musk’s 30-year vision.
I only have to live another 17 years to see if he was right.
It Only Took Four Good Decisions
“The world is full of foolish gamblers, and thy will not do as well as the patient investor,” said Warren Buffet partner, the 99-year-old Charlie Munger.
Mad Hedge Technology Letter
March 1, 2023
Fiat Lux
Featured Trade:
(THE VISION FUND LACKING VISION)
(WE), (SOFTBANK), (VISION FUND)
The most painful place to be in tech these days is where the venture capitalists used to make their name.
Private startups used to be glamorized, and now nobody wants to touch them with even a 10-foot pole.
VCs are the capital-rich guys who used to buy companies privately, hold onto them until they grew 10X, and then dish them off to the public once they went ex-growth.
That playbook was the surefire way to capitalize from companies during their highest growth phase.
Softbank’s Vision Fund was the poster boy for this strategy as the founder of Softbank Masayoshi Son deployed gargantuan resources from his Japanese telecom company (mostly in the form of debt) to pour into private tech firms.
Now, The Vision Fund has basically blown up as ideas like throwing $300 million at a dog walking app haven’t resulted in higher valuations from ludicrous types of aggressive investments.
Markets can behave irrationally for a while, but sooner or later, it regresses back to reality.
In the end, the world’s most brazen tech investor, Softbank, wasted billions helping to artificially lift tech valuations, only to see them plunge and lose their own money along with other adjacent investors.
In some cases like the office sub-let company WeWork (WE), they were the only investors to value assets at such lofty valuations. In WeWork’s case, they valued the company at $48 billion at its peak, and at the time of this writing, WE has a valuation of $920 million after finally going public.
So it’s not a surprise to see WE’s experience highlighting a broader failure of epic underperformance from Softbank with a decline in value for 73% of its 472 investments from an expert boutique firm that apparently is on the pulse of every new tech trend.
They would have done better with a monkey throwing darts at a dart board.
To address the headwinds, they are drastically reducing investment for the time being because they are tired of being wrong.
For the October to December quarter, SoftBank reported an investment loss of ¥731.94bn ($5.5bn), compared with a ¥1.38tn loss in the previous quarter for its two Vision Funds and a fund investing in start-ups in Latin America.
As of the end of December, SoftBank said the fair value of the $100bn Vision Fund I was down 4.4% from a year earlier due to markdowns in privately held companies despite gains in some listed holdings, such as ride-hailing groups Didi and Grab. The valuation for investments in Vision Fund II was down 6.2%
Son announced last year that he would step back from day-to-day operations to basically get out of the way of himself.
I applaud him for doing that because many arrogant leaders don’t understand when their time is up.
The private markets aren’t what they used to be and the deal breaker is higher rates.
This part of tech won’t come back until cheap money floods visionary ideas because these ideas are usually risky and most attempts become a zero.
Tech stocks will continue to be choppy in the meantime and continue to represent ideal trader markets for investors to jump in and out of tech stocks.
It’s natural for a reversion to the mean after a blistering January and big moves up and down will be the likely story in this stock pickers market for 2023.
However, the time for those 10Xers from VCs is dead until further notice.
